How to Start a NBFC Takeover Agreement

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What is NBFC Takeover?

A Takeover is a process by which one Company purchases the other Company. The Company making the purchase is the Acquirer Company while the one being bought is the Target Company.

Types of NBFC Takeovers

NBFC Takeover can be of two types:

  • Friendly Takeover

    This Takeover happens with mutual consent of both the Companies. The offer of taking over is made by the Acquirer and the same is accepted by the Target Company.

  • Hostile Takeover

    In this type of Takeover, the Acquirer Company tries to acquire the Target Company secretly. This kind of Takeover happens when the management of the Target Company is reluctant in accepting the offer of the Acquirer Company pertaining to the Takeover.

Prior approval from RBI

Prior approval of RBI is required in case significant changes would be made in the management and control of the Target Company. The conditions that require prior approval of RBI are:

  • There may or may not be any change in management after sale.
  • Any change in shareholding of the Company which results in at least 26% of the selling or buying of Paid-Up Capital.
  • Any change in the management of the Company.

When Prior Approval of RBI is not required?

The approval from RBI is not required in the following conditions:

  • If the shareholding goes beyond 26% as a result of buyback of shares or share reduction in capital after the approval of competent court has been taken.
  • If there is a change in management by 30%, which includes the Independent Directors or by the rotation of Directors in Board.

How to make an Application for prior approval of RBI?

An Application is required to be made to RBI on the letterhead of the Company. The documents given below are required to be attached with the Application:

  • Information regarding the proposed Directors and shareholders.
  • Declaration by all the proposed Directors and shareholders in regards to their non-association with any entity that accepts deposits.
  • Statement by all the proposed Directors and shareholders regarding their non-criminal background and non-conviction under Section 138 of Negotiable Instruments Act, 1881.
  • Information pertaining to the sources of funds which are required by shareholders to acquire shares in the NBFC.
  • Declaration by the proposed shareholders and Directors asserting their non-association with any entity that has been denied Certificate of Registration by RBI.
  • Bankers Report in respect to the proposed shareholders and Directors.

Where is the Application of approval to be submitted?

Application for Registration has to be made online at RBI’s official COSMOS website after physical submission of copy of the Application at Regional Office of RBI.

Both online and offline NBFC Application procedures are required to be followed by the applicants. There are two departments of Reserve Bank of India that supervises and regulates the functioning of NBFC’s in India.

  • DNBR (Department of Non-Banking Regulation)

    It is the responsibility of this department to conduct Fresh NBFC Registration process and make regulations for NBFC. It has a clear and advanced evaluation process pertaining to NBFC Application.

    As a part of the Registration process, if any additional documents are required, this department will send a formal notice or an e-mail asking for the same. A response to the e-mail/notice is expected by RBI within 30 days of the receipt of the e-mail/notice as a per NBFC regulations.

  • DNBS (Department of Non-Banking Supervision)

    This department is responsible for the post Registration compliances by a Company and other administrative issues. NBFC License can be expected by the applicant in 90 to 120 days after the successful acceptance of NBFC Application.

    Thereafter, Company will be registered on the website and the applicant will be required to download an Excel Form and upload the same again after filling in all the relevant details. Subsequently, Company Application Reference Number (CARN) will be generated.

    Upon receipt of CARN, the applicant will be required to submit the Application Form physically along with all the relevant documents to Regional Office of RBI. If RBI finds everything appropriate, then License will be issued to the applicant.

Public Notice if there is change in Management/Control

If the Takeover causes change in Management/Control, a 30 days prior notice shall be given in one leading national newspaper and one local newspaper stating the transfer of ownership or control by sale of shares (whether with or without transfer of shares).

A Public Notice indicates the following things:

  • Particulars of the Transferee.
  • Intention of selling or transferring the Ownership or Control.
  • Reasons for selling or transferring the Ownership or Control.

Procedure of NBFC Takeover

The entire procedure of NBFC Takeover is covered in the following steps:

  • Memorandum of Understanding

    The foremost step is the signing of Memorandum of Understanding (MOU) with the proposed Company. MOU signifies that both the Companies have agreed for the Takeover. The Directors of both – the Acquirer Company and the Target Company sign MOU. The requirements and the responsibilities of both the Companies are mentioned in MOU specifically. At the time of signing MOU, the Acquirer Company gives the token money to the Target Company.

  • Board Meeting

    Once MOU is signed, both the Companies shall convene Board Meeting to discuss the following matter:

  1. Reply to any query of RBI that may be raised in relation to the approval Application.
  2. Fixing the date, time and place for convening the Extra Ordinary General Meeting (EGM).
  3. Passing the resolution of EGM.
  • Public Notice

    Once approval has been obtained from RBI, a Public Notice shall be made in two newspapers within 30 days to invite any objection of the public with respect to the Takeover.

  • Share Transfer Agreement

    At the expiration of 31st day of publishing the notice in the newspaper, both the Companies shall sign Share Transfer Agreement. At the time of signing, the balance consideration shall be paid by the Acquirer Company to the Target Company.

  • No Objection Certificate from Creditors

    Prior to transferring the business to Acquirer Company, Target Company shall obtain NOC from its creditors.

  • Transferring Assets

    Once NOC has been obtained from the creditors and no creditor has raised any objection in regards to the Takeover, the assets of Target Company will be transferred to Acquirer Company, as approved by RBI. The transfer, however, should not be in contravention to any clause of the Company.

  • Evaluation of the Entity

    The evaluation of the entity post-Takeover shall be done in accordance with the rules provided by RBI. Post evaluation, a Certificate states the method for valuation shall be obtained from a Chartered Accountant.

  • Notice to Regional Office

    Once the valuation is done and approval has been taken, NBFC shall submit an Application on the letterhead of the Company to Regional Office of RBI. Post-Takeover, any changes in the Management should be continuously intimated to RBI.

The contents of the Application made to Regional Office of RBI shall be as follows:

  1. Acquirer Company’s sources of funds.
  2. Information regarding proposed shareholders and Directors.
  3. Declaration by all the proposed Directors and shareholders in regards to their non-association with any entity that accepts deposits.
  4. Statement by all the proposed Directors and shareholders that no criminal proceedings have been initiated against them in the past or are pending in any court of law.

Subsequent to the above-mentioned procedure, all the assets, as shown in Balance Sheet of Target Company shall be liquidated and the liabilities would be paid off. Acquirer Company will then receive the balance in the bank account in the name of Target Company. The balance will be as calculated on the basis of net worth, as on the date of the Takeover.

Expert Opinion

Takeover of NBFC is an elaborate process and requires multiple compliances. The chief Agreements are required to complete Takeover are -Memorandum of Understanding and Share Purchase Agreement. Apart from these, Public Notices for change in Management/Control, Board Meetings Notice, No Objection Certificate from creditors and notice to Regional Office also form part of the entire Takeover process.

Frequently Asked Questions

The activities that are not undertaken by an NBFC are industrial activities, agricultural activities, services related to sale/purchase/construction of immovable property, and sale of goods except securities.

The term “Net Owned Fund” means the Paid up Share Capital+ Profit+ Reserves & Surplus + Balance in Share Premium Account and Other Free Reserves – Investment in a Group of Companies either Directly or Indirectly – Accumulated Loss - Provision for NPA (Non Performing Assets) - Deferred Expenses - Investment in Shares of other NBFCs - Investment in Bond or Shares or Debenture in Group Companies that too in excess of 10% of NOF (Net Owned Fund).

The term “Systematically Important NBFCs” denotes those NBFC that have an asset size above Rs 500 crores, according to the last Audited Balance Sheet.

The powers of RBI are it lays down policies, penalizes in case of violation, can prohibit from accepting deposits, and can cancel the certificate of registration.

The term “NBFC Takeover” denotes an event in which one business entity purchases another business entity.

Yes, it is mandatory to have a minimum current assets balance of Rs 2 crores. Further, the same can be in the form of Loans to Customers or Bank Balance.

It is mandatory to acquire NOD from RBI before proceeding NBFC sale or change in management or transfer.

For Change in name, the applicant needs to obtain “Name Availability Certificate” from the MCA (Ministry of Corporate Affairs), and after that, it can reach to Apex Bank for NOD. Once a NOD is granted, the applicant can proceed for the name change.

Yes, there is a need to have ITRs (Income Tax Return) for the last 3 financial years during the process of NBFC Takeover.

Yes, the applicant must have a minimum CIBIL Score of more than 700, and there need be no dispute or write off of loans for the past 24 months with banks or NBFC.

The functions of NBFC are Infrastructure Development, Providing Customized Loan Solutions, Wealth Creation, Providing Employment Opportunities, and Financial Assistance to the Marginalized Communities of India.

After the filing of the application, the process of Scrutinization requires around 3 to 4 months.

The different types of loan provided by NBFC are Loans against Securities, Unsecured Personal Loans, Business Loans, Gold Loans, Loans to MSMEs, etc.

The merits of an NBFC Takeover are that it increases sales and revenue; and escalates the profitability of the target company by reducing the scope of competition.

The main difference between the two is that an NBFC is not eligible to issue DDs (Demand Drafts) and Cheques to its customers. In contrast, a traditional bank is qualified for both.

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